The Allahabad High Court has held that the statutory burden under Section 123 of the Customs Act, 1962 cannot be discharged merely by producing general purchase invoices or business records. The documents must have a specific, credible and traceable nexus with the seized gold.
The bench of Justice Shekhar B. Saraf and Justice Abhdesh Kumar Chaudhary restored confiscation of three gold bars weighing 2,997 grams after finding that the clandestine transportation, foreign markings, contradictory statements and mismatch with the documents collectively established a reasonable basis for invoking the statutory presumption of smuggling.
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The proceedings arose from the interception of two persons by officers of the Directorate of Revenue Intelligence (DRI), Lucknow Zonal Unit, at Prayagraj on November 28, 2020.
The two persons were travelling by bus from Nagpur towards Prayagraj. During personal searches, DRI officers recovered two gold bars from Tiwari and one gold bar from Mishra. The bars carried markings including “Valcambi Suisse 1 KG Gold 995.0” and “Suisse 1 KG Gold 995.0”.
The three bars collectively weighed 2,997 grams and were valued at approximately Rs. 1.43 crore at the time of interception. The gold bars had been wrapped in tape and concealed inside the shoes of the two carriers.
According to their statements recorded during the investigation, the two carriers stated that the gold was foreign-origin smuggled gold which had been handed over to them by Anand Navalchand Pugaliya, proprietor of Pugaliya Jewellers, for delivery at Prayagraj. They also stated that they did not possess documents relating to the purchase or import of the gold.
The DRI consequently seized the gold under Section 110 of the Customs Act on the reasonable belief that it was smuggled goods liable to confiscation under Section 111 read with Section 123 of the Act.
Following the statements of the intercepted persons, DRI conducted a search at the residential and business premises of Anand Pugaliya.
The officers recovered approximately 2,43,640.64 grams of silver bullion from the premises. Cash aggregating to approximately Rs. 29.71 lakh was also recovered.
The department took the view that the silver had been smuggled into India without payment of customs duty and that the cash represented sale proceeds of smuggled gold or silver. Both were therefore seized under Section 110 of the Customs Act.
The seized gold was subsequently examined by the Central Revenue Control Laboratory (CRCL), New Delhi. The chemical examination confirmed that the bars were gold having purity ranging between approximately 99.35% and 99.67%.
During the investigation, Anand Pugaliya furnished various documents in support of his claim that the gold had been legally acquired.
These included GST records, purchase invoices for gold and silver, delivery documents, labour charges paid to a refiner, balance sheets, sale and purchase ledgers, stock statements and bank statements.
The defence also relied upon documents concerning the alleged conversion of smaller pieces of gold into three one-kilogram bars by a local refiner, Shri Vijay Anandrao Devkar.
The refiner had stated that Pugaliya had given him 38 pieces of gold weighing approximately 3 kg, which were to be melted and converted into three bars. However, Pugaliya’s version was that 35 pieces had been sent for conversion.
This discrepancy subsequently became one of the key circumstances relied upon by the High Court.
The investigation also revealed inconsistencies in Pugaliya’s statements regarding the source of the gold.
In one statement dated April 22, 2021, he stated that the gold had been purchased from Safari Bullion and Jewellers Jasraj Shantilal Baid.
However, in subsequent statements dated June 2 and June 4, 2021, he stated that the gold had been purchased only from Safari Bullion.
The department also noted that the defence could not identify a particular purchase invoice and corresponding stock-register entry directly relatable to the seized gold.
There was another important discrepancy concerning the alleged refining process.
While Pugaliya relied upon the conversion of 35 gold pieces into three bars, the refiner stated that he had received 38 pieces and had converted them into three bars without any foreign marking. He further stated that he did not possess the dye necessary to engrave the particular one-kilogram marking appearing on the seized bars.
The refiner also stated that, when shown photographs of the seized bars bearing the “Valcambi Suisse” marking, he had not supplied such marked gold bars to anyone during the preceding two years.
After considering the investigation material and defence submissions, the adjudicating authority concluded that the gold was foreign-origin smuggled gold.
By order dated November 14, 2022, the authority ordered absolute confiscation of the 2,997 grams of foreign-origin gold under Sections 111(a), 111(b), 111(h) and 111(m) of the Customs Act.
The authority also ordered confiscation of the silver bullion and cash and imposed penalties on the concerned persons under the Customs Act.
The Commissioner (Appeals), however, set aside the confiscation.
The appellate authority noted that Pugaliya had produced GST-paid purchase invoices, which were certified by a Chartered Accountant, and that the purchases were reflected in the stock ledger.
According to the Commissioner (Appeals), the mere presence of foreign markings on gold did not by itself establish that the gold was smuggled.
The Commissioner (Appeals) concluded that the burden under Section 123 had been discharged and that the department had failed to establish the smuggled nature of the gold beyond the existence of foreign markings.
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) affirmed the Commissioner (Appeals)’s decision on April 23, 2025.
The Tribunal relied upon the GST-paid invoices, their reflection in the books of accounts and the Chartered Accountant’s certification.
It also observed that the Revenue had not effectively contradicted the documentary evidence produced by the dealer.
The Tribunal essentially proceeded on the basis that the burden cast upon the respondent under Section 123 had been discharged and that the Revenue was thereafter required to disprove or contradict the documents.
The Revenue challenged this approach before the High Court.
The principal issue before the High Court was the operation of the reverse burden under Section 123 of the Customs Act.
Section 123 provides that where notified goods, including gold, are seized under the Customs Act on the reasonable belief that they are smuggled goods, the burden of proving that they are not smuggled falls upon the person from whose possession the goods were seized and, where applicable, the person claiming ownership.
The High Court emphasised that the reverse burden does not arise automatically merely because goods are seized.
The department must first satisfy three conditions: The goods must be goods to which Section 123 applies; The seizure must be made under the Customs Act; and The seizure must be based upon a reasonable belief that the goods are smuggled.
Once these conditions are fulfilled, the statutory presumption operates and the burden shifts to the person concerned to establish that the goods are not smuggled.
Applying these principles to the gold bars, the Court held that the initial burden on the Revenue had been discharged.
The Court relied upon multiple circumstances rather than any isolated factor.
These included the foreign markings on the gold, the clandestine manner in which the gold was transported, and the statements of the persons from whose possession the gold was recovered.
The Court therefore held that the Revenue had established the necessary reasonable belief for triggering Section 123.
One of the most important observations in the judgment concerns the nature of documentary evidence required to discharge the statutory burden.
The Court held that discharge of the burden under Section 123 does not mean merely producing documents relating generally to the business of the person claiming ownership.
According to the Court, the documents must be specific; relevant; credible; genuine; and directly and traceably connected with the gold that was actually seized.
The Court made it clear that irrelevant or generic business documents do not by themselves discharge the reverse burden.
Thus, GST invoices and entries in business records cannot automatically establish the lawful acquisition of particular seized gold bars unless a demonstrable nexus exists between those documents and the seized articles.
The High Court found the explanation regarding conversion of gold pieces particularly problematic.
Pugaliya’s version was that 35 pieces of gold had been converted into three bars.
The refiner, however, stated that he had received 38 pieces and converted them into three bars without any foreign marking.
The refiner also stated that he did not possess the dye necessary to place the markings appearing on the seized bars.
Further, after examining photographs of the seized gold, the refiner stated that he had not supplied those marked bars to anyone during the relevant period.
The High Court concluded that these circumstances demonstrated a clear mismatch between the gold allegedly sent for refining and the gold actually seized.
The Court observed that the defence had failed to explain the foreign markings appearing on the seized bars.
The Court strongly criticised the manner in which the Commissioner (Appeals) and CESTAT dealt with the evidence.
According to the High Court, both authorities effectively shifted the burden back to the Revenue merely on the basis of the invoices produced by the owner.
However, they failed to adequately consider the other material evidence, including the clandestine manner of transportation; the foreign markings on the bars; statements of the carriers; the contradictory statements of the owner; the refiner’s statement; the mismatch between 35 and 38 pieces; absence of specific invoices corresponding to the seized bars; and the absence of corresponding entries establishing the identity of the seized gold.
The High Court held that this amounted to a patent error of law and perversity in appreciation of evidence.
The Court also addressed the limited jurisdiction of a High Court in an appeal involving a substantial question of law.
Ordinarily, CESTAT is the last fact-finding authority, and a mere disagreement with its factual conclusion would not justify interference by the High Court.
However, the High Court referred to Supreme Court precedents including Commissioner of Customs v. Vijay Dasharath Patel, Arulvelu v. State and S.R. Tewari v. Union of India to hold that interference is permissible where material evidence has been ignored, irrelevant factors have been considered, legal principles have been incorrectly applied or the finding is perverse.
The Court therefore held that the present matter involved a substantial question of law because the Tribunal had overlooked vital evidence and had misapplied the statutory burden under Section 123.
Interestingly, the High Court reached a different conclusion regarding the silver bullion.
The Court observed that Section 123 could be invoked in relation to silver only after the Revenue established that the silver was smuggled.
Unlike the gold, the silver was not recovered during clandestine transportation. It was recovered from residential and business premises.
There were also no foreign markings on the silver and the intercepted carriers had not made statements implicating the silver in any smuggling activity.
The department’s principal ground was that the quantity of silver recovered exceeded the quantity reflected in the stock ledger.
The Court held that this alone was insufficient to establish the necessary nexus between the silver and smuggling.
Accordingly, the initial burden under Section 123 was not discharged in relation to the silver, and the reverse burden never shifted to the respondent.
The Court similarly refused to sustain confiscation of the cash.
The cash, being Indian currency, was outside the scope of Section 123 as a non-notified item.
The Revenue had sought to treat the cash as sale proceeds of smuggled gold and silver, partly relying on the antecedents of the owner and pending proceedings under the Benami Property Transactions Act.
The High Court held that the cash had been seized merely on suspicion and that there was no cogent evidence establishing that it represented proceeds of smuggled goods.
The Court noted that the cash was neither recovered in a clandestine manner nor accompanied by evidence connecting it to the sale of smuggled goods.
In its final order, the High Court answered the two substantial questions of law in the affirmative in relation to the three gold bars.
The Court restored the adjudicating authority’s order insofar as it concerned confiscation of the 2,997 grams of gold bars.
However, the findings of the Commissioner (Appeals) and CESTAT concerning the silver and cash were upheld.
Thus, the result was:
Gold: Confiscation upheld/restored.
Silver: Confiscation not sustained.
Cash: Confiscation not sustained.
Since the Court upheld confiscation only in relation to the gold, it reduced the penalties imposed by the adjudicating authority to 50% for the three persons.
The three customs appeals were consequently partly allowed and disposed of.
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